Baosteel Co.,Ltd.Alert:Baosteel 9M16in line with consensus and DBe

Baosteel 9M16 in line with consensus and DBeBaosteel reported its 9M16 results. The company has delivered a top-line ofRMB133.6bn, achieving 78% of full year Bloomberg consensus. Baosteel alsoreported a cost cut of RMB1.1bn. The cost reduction together with improvedmarket condition allowed Baosteel to have an 83% YoY improvement for its9M16 operating profits. The company’s 3Q16 operating profit declined 11%QoQ. Yet, impairment reversal and investment income in 3Q16 enabledBaosteel’s PBT to improve by 9% QoQ. Overall the company’s 9M16 NPATachieved 77% of Bloomberg consensus FY16 estimates and 70% of FY16 DBeNPAT. We deem the results in line with consensus estimates.

    Baosteel guides FY16 NPAT 600% to 800% YoY growthWith 600% to 800% YoY growth, the company’s 2016 full year NPAT shouldbe ranging from RMB7bn to RMB9bn. That should mean current consensus atRMB7.3bn will potentially move up a bit and also implies Baosteel’s 4Q16 islikely to be QoQ flat. With current spot spreads (proxy for steel millprofitability) off from the 3Q16 average level, Baosteel should have convictionabout its own further cost reductions or strong shipments in 4Q16.

    Re-iterate Buy on valuationsThough we don’t like the valuation Baosteel paid for the Baosteel-Wugangmerger, the company’s results still demonstrated Baosteel’s own operationsremain best in class in China. While most of its Chinese A share peers aretrading at book value or above, we believe Baosteel trading at 0.8x 2016DBeBVPS remains attractive. As such, we maintain our Buy rating for Baosteel.